For some time now there has been a remuneration code affecting pay for bankers and, more recently, managers of alternative investment funds (AIFMs). This has led to greater bonus deferral, payment in shares or units, bonus clawback arrangements and, in the case of bankers, controversial bonus capping.
As part of a wider consultation on Ucits V and related implementation, the FCA has now published a proposed remuneration code affecting senior employees at Ucits’ fund managers. The FCA consultation also looks at important formal arrangements on custody and depositary services that Ucits V brings in.
Many UK Ucits managers will, by virtue of the work they also do, already be covered by the existing remuneration codes for AIFM managers. Even so, because there are some different rules under the Ucits remuneration rules, all Ucits managers are still likely to have plenty to implement or review if they are to be in good shape before 18 March 2016 – the deadline for full Ucits V implementation.
The Ucits remuneration code will be the FCA’s 5th sectoral remuneration code. What underlies them all is the regulator’s concern that badly structured remuneration gives rise to risky behaviour, and that this can be countered by good governance and strong remuneration structures, although there is also heavy political pressure here. As such, the Ucits remuneration code draws heavily on the framework and language of the other remuneration codes.
Like them, it imposes familiar requirements for senior staff at the management company. These include deferring bonuses, investing in funds managed by the manager (though unlike with the large banks there is no bonus cap), as well as strong governance processes.
There is also a “proportionality” override, in that the general rules need not apply to smaller managers or where lower amounts of remuneration are received. This may mean that many rules may not apply to the manager in question. Finally, there are also separate provisions requiring specific disclosures on Ucits manager remuneration in fund prospectuses, key investor information documents and annual reports.
Ucits V already contains a significant amount of detail but, as always, much needs to be fleshed out in relevant guidance and FCA rules – hence the consultation. ESMA, however, is still consulting on its own guidelines, from which the FCA rules are drawn, and this could mean that further FCA clarification may emerge once the final ESMA guidelines are published, which is expected to be in early 2016.
In a recent seminar on Ucits V the general concern from participants was the uncertainty that still exists at this late stage at the European level, on proportionality, and the overlap between relevant codes. Key issues are:
Proportionality: Ucits V allows the rules relating to remuneration to be interpreted so that not all firms need apply them in their full rigour if it is proportionate not to do so. Many AIFMs and banks do not currently have to apply deferral or payments in share, for example, because of similar rules on proportionality, and many Ucits managers are keen to have a flexible regime for them too. However, there is currently a wide debate at EU level whether in fact the legislation (across the financial services sector) does or should allow this. This uncertainty is worrying as this issue does not look like it will be resolved soon.
Being subject to multiple regimes: Many firms undertake different functions and can be caught under several codes, which are all slightly different and give rise to both overlap and conflict issues. The FCA has some draft guidance on this already, but has said that it is waiting for ESMA guidelines before considering the position further.
Drawing up an appropriate policy: Although many firms will already have these in place, there are difficult issues to consider. These include setting up remuneration committees and the relevant governance structure, much more internal reporting and justification for pay, and identifying and drafting changes for relevant employees, which may involve negotiations with them.
Documentation and reporting: Fund documentation will now have to start including remuneration descriptions and disclosures.
Implementation: The FCA proposes that the new rules will only apply to bonuses awarded for financial or performance years starting on or after 18 March 2016, and in many cases the rules will only bite from 1 January 2017. However, FCA adds that the ESMA guidelines may cause it to review this position. The deadline for comments on the FCA proposals is 9 November, and the deadline for comments on the ESMA guidelines is 23 October.
Karagh Gilliatt, Aidan Campbell and Nicholas Stretch are partners in law firm CMS, advising Ucits funds and their managers.